chap02-kieso-ifrs4-ppt-lecture-notes.pdf

chap 2 intermediate

1. Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 2
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Learning Objective 1
Describe the usefulness of a conceptual
framework and the objective of
financial reporting.
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Conceptual Framework
Conceptual Frameworkestablishes the concepts that underlie
financial reporting.
Need for a Conceptual Framework
•Rule-making should build on and relate to an established
body of concepts.
•Enables IASB to issue more useful and consistent
pronouncements over time.
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Overview of the Conceptual Framework
Three levels:
•First Level= Objective of Financial Reporting
•Second Level= Qualitative Characteristics and Elements of
Financial Statements
•Third Level= Recognition, Measurement, and Disclosure
Concepts.
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Conceptual Framework for Financial
Reporting
ILLUSTRATION 2.1
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Basic Objective
To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
•Provided by issuing general-purpose financial statements.
•Assumption is that users need reasonable knowledge of
business and financial accounting matters to understand
the information.
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Learning Objective 2
Identify the qualitative characteristics
of accounting information and the
elements of financial statements.
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Fundamental Concepts
Qualitative Characteristics of Accounting Information
IASB identified the Qualitative Characteristicsof accounting
information that distinguish better (more useful) information
from inferior (less useful) information for decision-making
purposes.
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Hierarchy of Accounting Qualities
ILLUSTRATION 2.2
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Fundamental Quality—Relevance
To be relevant, accounting information must be capable of
making a difference in a decision.
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Predictive Value
Financial information has predictive valueif it has value as an
input to predictive processes used by investors to form their own
expectations about the future.
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Confirmatory Value
Relevant information also helps users confirmor correct
prior expectations.
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Materiality
Information is material if omitting it or misstating it could
influence decisions that users make on the basis of the
reported financial information.
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Fundamental Quality—Faithful
Representation
Faithful representationmeans that the numbers and descriptions
match what really existed or happened.
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Completeness
Completenessmeans that all the information that is necessary
for faithful representation is provided.
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Neutrality
Neutrality means that a company cannot select information to
favor one set of interested parties over another.
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Free From Error
An information item that is free from errorwill be a more
accurate (faithful) representation of a financial item.
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Enhancing Qualities
Enhancing qualitative characteristics are complementary to the
fundamental qualitative characteristics.
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Enhancing Qualities—Comparability
Information that is measured and reported in a similar manner
for different companies is considered comparable.
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Enhancing Qualities—Verifiability
Verifiabilitymeans different knowledgeable and independent
observes could reach consensus.
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Enhancing Qualities—Timeliness
Timelinessmeans having information available to decision-
makers before it loses its capacity to influence decisions.
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Enhancing Qualities—Understandability
Understandabilityis the quality of information that lets
reasonably informed users see its significance.
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Basic Elements
Asset
A present economic resource controlled by
the entity as a result of past events. An
economic resource is a right with the
potential to produce economic benefits.
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Basic Elements
Liability
A present obligation of the entity to
transfer an economic resource as a result
of past events.
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Basic Elements
Equity
The residual interest in the assets of the
entity after deducting all its liabilities.
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Basic Elements
Income
Increases in assets, or decreases in
liabilities, that result in increases in equity,
other than those relating to contributions
from holders of equity claims.
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Basic Elements
Expenses
Decreases in assets, or increases in
liabilities, that result in decreases in
equity, other than those relating to
distributions to holders of equity claims.
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Learning Objective 3
Review the basic assumptions of
accounting.
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Assumptions
Economic Entity–company keeps its activity separate from its
owners and any other business unit.
Going Concern -company to last long enough to fulfill objectives
and commitments.
Monetary Unit -money is the common denominator.
Periodicity-company can divide its economic activities into time
periods.
Accrual Basis of Accounting–transactions are recorded in the
periods in which the events occur.
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Learning Objective 4
Explain the application of the basic
principles of accounting.
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Basic Principles of Accounting
Measurement Principles
•Historical Costis generally thought to be a faithful
representation of the amount paid for a given item.
•Fair valueis defined as “the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.”
IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
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Basic Principles of Accounting
Revenue Recognition Principle
When a company agrees to perform a service or sell a product
to a customer, it has a performance obligation.
Requires that companies recognize revenue in the accounting
period in which the performance obligation is satisfied.
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Basic Principles of Accounting
Expense Recognition Principle
Outflows or “using up” of assets or incurring of liabilities
during a period as a result of delivering or producing goods
and/or rendering services.
ILLUSTRATION 2.6
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Basic Principles of Accounting
Full Disclosure Principle
Providing information that is of sufficient importance to
influence the judgment and decisions of an informed user.
Provided through:
•Financial Statements
•Notes to the Financial Statements
•Supplementary information
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Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.
•Rule-making bodies and governmental agencies use cost-
benefit analysis before making final their informational
requirements.
•In order to justify requiring a particular measurement or
disclosure, the benefitsperceived to be derived from it
must exceed the costsperceived to be associated with it.
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Summary of the Structure
ILLUSTRATION 2.7
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